سرمایه گذاری و بهره وری شرکت های پرتفوی
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : IIMB Management Review, Volume 22, Issue 4, December 2010, Pages 186–197
Venture Capital (VC) has emerged as the dominant source of finance for entrepreneurial and early stage businesses, and the Indian VC industry in particular has clocked the fastest growth rate globally. Academic literature reveals that VC funded companies show superior performance to non VC funded companies. However, given that venture capitalists (VCs) select and fund only the best companies, how much credit can they take for the performance of the companies they fund? Do the inherent characteristics of the firm result in superior performance or do VCs contribute to the performance of the portfolio company after they have entered the firm? A panel that comprised VCs, an entrepreneur and an academic debated these and other research questions on the inter-relationships between VC funding and portfolio firm performance. Most empirical literature indicates that the value addition effect dominates the selection effect in accounting for the superior performance of VC funded companies. The panel discussion indicates that the context as well as the experience of the General Partners in the VC firms can influence the way VCs contribute to the efficiency of their portfolio companies.
Venture Capital (VC) has emerged as an important and dominant source of financing today for entrepreneurial and early stage businesses. Many of the successful businesses that we know today such as Cisco, eBay, Apple, and Google received VC funding at one point or the other. Some of the companies in India that received VC funding include Polaris, Biocon, Sasken, Shoppers’ Stop, and Landmark. VC backed firms contribute to the economy through the creation of jobs, an exceptional growth rate, their heavy investments, and their international expansion (Romain & Potterie, 2004). The proportion of companies that receive VC funding, however, is very small. Kaplan and Lerner (2010) indicate that only 1/6th of 1% of new businesses manage to obtain VC funding. Despite the small proportion of companies that receive VC funding, there has been a growth in the availability of VC over the years in the different economies. In the US, which is by far the leader in VC investments by a big margin, the availability of VC funding has been stable with respect to the stock markets. From 2005 to 2008, annual commitments to VC ran in the range of $25–$33 billion. The historical average (since 1980) of VC commitments in the US, measured as a fraction of the total market value of equity, was 0.138%. Since 2002, however, the commitments have been slightly above the historical average at 0.146%. Similarly, the historical average of the VC investments as a fraction of total stock market value was 0.164%, and the average since 2002 is 0.155% (Kaplan & Lerner, 2010). If we factor the growth in the economy and the stock market over the years, we can infer that the availability of VC funding has steadily increased over the years. By contrast, the growth of VC in India has been more recent. The amount invested increased from $1.4 billion in 2004 to $22 billion in 2007, before reducing to $8.1 billion in 2008 (Thillai Rajan & Deshmukh, 2009). The VC investments in India grew at a CAGR of 47% during 2004–08, which is one of the highest growth rates in the world. By contrast, the investments in the US grew only at the rate of 6% during the same period. VC investments in India as a percentage of GDP grew from a mere 0.4% of GDP in 2004 to more than 1.5% of GDP in 2008, whereas VC investment in the US as a percentage of GDP is relatively constant and hovers around 0.7%–0.8% of GDP. This part of the paper provides an academic perspective on how venture capitalists (VCs) contribute to the portfolio companies that they have invested in. The rest of the academic perspective is structured as follows: Section 2 provides an overview of VC investment. VC has several features that distinguish it from other sources of financing. The differences between VC and bank financing, a prominent source of financing for businesses, are also highlighted. Section 3 discusses the performance of VC funded and non VC funded companies. Examining whether VC funded companies show superior performance as compared to non VC funded companies, this section summarises the findings from some well known comparative studies on VC funded and non VC funded companies. Section 4 discusses the reasons behind the superior performance of VC companies. Two main ideas are explored in the academic perspective viz., whether the better performance can be attributed to better screening and selection of investment opportunities or because of managerial inputs and value addition provided by VCs after investment. Section 5 provides a summary and identifies some areas where more research is needed.
نتیجه گیری انگلیسی
Thillai Rajan: Academic literature reveals that by and large VC funded companies have shown superior performance to non VC funded companies. The question then is, how much of the superior performance can be attributed to VCs given that VCs are very selective and they fund only the best companies. Is superior performance then a result of the inherent characteristics of the firm or do VCs contribute after they have entered into the firm? Samir Kumar: The answer is, both. Some would argue that the top quartile VC firms because of their reputation get the best entrepreneurs and therefore the companies funded by these firms are inherently superior and therefore they perform better. But I would not completely subscribe to that view point. I think some of the top quartile companies have a special network that comes into play for their portfolio companies that gives them better access to customers, better exits, and better partnership opportunities. Therefore, the VCs definitely contribute to the performance of their portfolio companies. If I have to put a number, I would say that about 50–60% of the superior performance of VC funded firms could be attributed to the inherent qualities of the firms that the VCs fund and the remaining 40–50% of the performance could be attributed to value addition by VCs. The systems, processes, governance and reporting that we make mandatory, play a role in the performance differential. Since I invest in early stage companies, I can say that the processes that we help put in place play a role in the success of early stage companies. G Sabarinathan: The answer is contextual. Many VCs believe that their work really begins after the cheque has been signed and handed over; therefore selection is not the major thing. My trouble is with the belief that VCs play a role in the success of their portfolio companies. Though VCs may act in the best interests of the company it is very hard to prove that they have affected the outcome positively. Most successful VCs would probably endorse this view as well. Gorman & Sahlman’s 1989 paper looked at a matched sample of companies and investors and interviewed them on the perceived importance of what the VC thought he did to the portfolio company and on what the entrepreneur perceived it to be, and the perceived importance of what the VC thought he should do to the company and that of what the entrepreneur thought he should do. The research revealed a huge difference between the perceptions of the two. Further, the measurement and methodology issues come into focus when one considers the aspect of attribution. Even case studies have limitations when it comes to teasing out these nuances. Guhan Subramaniam: In a typical VC fund, the portfolio consists of anywhere between 10 and 15 companies, of which only about 25–30% of the companies perform well. In terms of value addition, the VCs do not neglect any company in the portfolio to start with. The contribution is the same for all companies in the portfolio. More often than not, the involvement of the VCs, at least in terms of time spent, is a lot more with companies that have gone down without a whimper than with companies that have achieved a huge return. This leads me to believe that the intrinsic factors such as a competent management team, conceptualising, positioning and delivering a value proposition, being in the right marketplace at the right time, and a buoyant economy become critical issues for a company to succeed besides the VCs value addition. VC’s value addition alone is no substitute for success or increased efficiencies. Ramesh Emani: I often tell entrepreneurs to go for VC funding only to make sure that somebody else also believes in their story. It is like an endorsement, a good benchmark process, so that people will not embark on a foolhardy business. Secondly, the part played by the VC is similar to that of the audit firms and sometimes even that played by the board. VCs can help in identifying and addressing the shortcomings but they might not be able to contribute much in terms of adding to the positives. Addressing the negatives will make sure the company will not fail but it is addressing the positives that is essential for success. The reason is VCs are not as familiar with the business as the entrepreneurs are and usually do not have in depth understanding of the product, customer or the technology. When the VCs have good understanding of the business then they can contribute to the value addition process. For example, a VC investor like Vinod Khosla can contribute to his investments in the communications technology sector given his business experience. Thillai Rajan: The viewpoints that have emerged are quite interesting and in a way contrasting to the findings in academic literature, which are largely based on the experience of the developed countries. Most empirical literature has indicated that the value addition effect dominates the selection effect in accounting for the increased efficiency of the VC funded companies. However, the views of the panel members seem to indicate that the absence of such a dominance of the value addition effect, and if at all there is a dominance, it could be the selection effect. One of the reasons for this could be the background of the VC investors operating in India. I’d like Samir and Guhan to address this point – You work in different spectrums as far as investment is concerned. Can we go to the next level and see how you are involved with your portfolio companies as early stage and late stage investors respectively? Guhan Subramaniam: My experience says that between the VC and the portfolio company there is a stage where you are building trust; the investor is being evaluated as much as the investee. Some entrepreneurs are clear that they do not want a high level of interference. Every entrepreneur has a dream much beyond wealth creation, and in the process of achieving his dream there could be conflicts between him and the VC on varied issues from choice of technology to target markets. It is important that we avoid conflicts in the early stage and understand what is expected by the entrepreneur. Entrepreneurs may want inputs in specific areas. So the initial process of identifying where VCs could contribute and the extent of contribution should be sorted out first. For instance, VCs without the requisite technological knowledge could focus more on contributing to the financial aspects of the portfolio company. VCs cannot add value to every aspect of the business; I have found that sometimes it might be best to step aside and do nothing until asked. Value addition should not be thrust upon companies; the need has to be felt and it has to be asked for. To address your query, contribution to a portfolio company will vary based on the stage of investment and the profile of the investor. PE/VC investors making investments in growth stage companies would be focused on enabling companies build strategic relationships, strengthening the management team and leadership, enlarging the composition of the board, leveraging changes in statutory policies, financial optimisation, and so on. Samir Kumar: In my view there are two types of VC investors. One, who understand the industry so well that they figure out the idea and put a team around the idea to implement it. Typically these teams are entrepreneurs whom the VC investors have backed before, and who are now being backed in subsequent firms. The second type, into which we (and many Indian VCs) fall, believe in backing entrepreneurs who are following their dream. We have no great knowledge of the industry, the market or the customers and we think the entrepreneur knows much more about these things and if we think he has a plausible story, we back him. Adding to what Ramesh Emani said, another area where early stage investors could contribute in is the elimination of negatives, which in itself is a huge positive, and it is one thing we are called to do time and time again. We do not go in with a preconceived notion of what value to add, but the value that we add depends on a specific company, and is different in different situations. In the Indian context, many VC investors have transitioned to become private equity investors. The reason behind this transition could be that VC investment needs different skill sets. It needs skill sets of people coming from prior experience in business operations. Unlike investors with a background in investment banking or lending, investors with an operating experience are able to understand the needs of an entrepreneur and are able to add real value to an entrepreneur. I will close with an example from the other side. I worked for a while with a startup which was funded by a prominent VC firm. As Head of AsiaPac, when I visited their Hong Kong office and explained the nature of our products and the sort of help we wanted, they promised me a meeting with the head of the customer organisation, when the person I really wanted to meet and who would be useful to my sales effort was several levels below the head. Finally, nothing resulted from that request. So when we started as a VC investor, I was very clear that value addition should not be thought of in grandiose terms, but as a way of doing several small things which cumulatively make a big difference. Thillai Rajan: The discussion on the two broad categories of VCs is interesting. In the first, which is commonly seen in the West, the VCs have a strong understanding of the technology and business space. In the second type, which is more often seen in India, the VCs may not have as good an understanding of the business as the entrepreneur. Therefore, in India, entrepreneurs play a central role in the funded companies and investors rely more on the management of the portfolio company. Contrastingly, in developed countries we have heard stories where the VCs often replace the top management team in the portfolio company if the performance is poor. G Sabarinathan: The belief that VCs replace CEOs and top management is exaggerated. Academic research establishes that it doesn’t happen as often as people think it does. The evidence on the effectiveness of this step is very mixed. In the Indian context, I believe that (and as a former practitioner) a lot of what you do is defined by the administrative jurisdiction within which you conduct business. The state plays an important part in the way business is conducted in emerging markets, whether it is related to governance or structuring or the way you write contracts – in India there is a significant ‘Indianness’ that creeps in into all aspects. Many covenants that are a part of a standard VC investment agreement can be difficult to enforce in India. For example, it becomes difficult to enforce a ‘drag-along’ or a ‘tag-along’ clause in India; the courts simply will not recognise them as they are considered inequitable. Similarly, the courts have never enforced a buy back clause that is often found in VC investment agreements. Yet we have all these agreements, which some people say exist for ‘moral suasion’. Samir Kumar: I agree with Prof Sabarinathan on the changing of the CEO. If you are changing the CEO it means that you have a failed investment that you are trying to salvage. The fact is that you have an entrepreneurial team which is pursuing a dream and it is very hard to substitute it. May be at a later stage, when the company has evolved and become profitable, with the consent of the entrepreneurial team you could bring in a seasoned CEO who would take it to the next level. But not in the first few years. Guhan Subramaniam: Today, for a startup, an entrepreneur is a person who is passionate about technology that he believes will succeed. What this leads to, especially with early stage investments is that VC firms look at the entrepreneur’s idea and the management team around the idea while making the investment. Somewhere midway the VC firm realises that while the entrepreneur is very passionate about the technology, he is not a good manager; the firm needs somebody who can manage cash effectively, be assertive and manage well with clear milestones. These are things which seem to escape when the investment is made initially. We are able to see these hurdles only half way down, and hence the need to induct a professional, an experienced CEO to lead the business instead of the entrepreneur. The downside is that the company may not be able to attract another CEO, as prospective CEO candidates may consider such a development as interference by VCs, and it might be viewed unfavourably. While change of CEOs does not happen often, when it needs to be done, we should have the courage to go ahead and do it. Thillai Rajan: Ramesh, as an entrepreneur could you reflect on the topic of value addition and how it influenced your choice of investor? Before that, could you also share the reasons why you chose to go for VC financing? We know that there are a lot of conditionalities associated with a VC investment – you have to dilute your shareholding, if things don’t go well you could be subjected to extra monitoring, and so on. Ramesh Emani: For an entrepreneur in the technology and services sector, there are limited sources of capital. Either you put in your own money or you take money from friends and family. Even in the developed country markets there are no other institutions other than VCs to raise money. The draconian clauses or the drag-along and tag-along clauses do not really matter because you know that if you fail, you fail as a company to deliver certain results and you will have to exit. People, even outside India, do not seem very troubled by these considerations. What troubles entrepreneurs about VCs is when they are forced to merge with somebody else. This happens when the company is not doing very well but is not doing badly either. The opinion of the investor and the VC may differ; when you have completed three or four years and have not reached your assigned goal, then considerations such as removal of the CEO or mergers may arise and opinions may differ. In selecting a VC investor, if you don’t have a choice you would go with whoever is willing to put up the money. But, assuming one has a choice, it is the comfort level that is the consideration. Because the VCs are in some sense an extension of the management, they are part of the team, and therefore it is important that you recognise the level of comfort with the investor. In my case, I have known my investor for a long time and we had worked in the same organisation earlier. But when I advise many young entrepreneurs who might not have the advantage of knowing the investor like we did, I tell them that personal comfort with the investor is very important because they are an extended part of your team. Audience: You haven’t talked much about failure. Are failing companies easier to spot or do they take you by surprise? The issue of predictability – is it different with companies that eventually fail as opposed to the winners? Guhan Subramaniam: It is a documented fact that no more than 30% of the companies in a portfolio really give you expected returns. So we do build in failure into our scheme of things right at the beginning. Despite the fail-safe system, failures in a portfolio – both predictable and surprises are not uncommon. One of the key processes that VCs and private equity firms perform is monitoring. We have a fairly rigid monitoring system in terms of information on performance that goes much beyond the statutory requirements of a board meeting. Effective monitoring does throw up a pattern, to indicate companies that may not succeed. Monitoring also results in a more productive discussion in terms of proactive initiatives such as a change in strategy. Those are things that even the management team at the entrepreneur’s end would welcome and we would take some collective action on strategies. In case of unexpected failures, such as a company banking on creating a particular IP which is rendered irrelevant by a sudden shift in technology, that would result in sudden death. Audience: Taking off from there, is the existing VC model the right one? Could it be improved upon? There are newer models such as the Y Combinator model, where the emphasis is not on monetary support but a lot of non-monetary assistance that smaller companies require. Such newer models seem to be more successful than the normal VC models. Are the traditional VC investment models being challenged? Samir Kumar: In the early stage model, it is less about money and more about time, which is why I made the point of the importance of the operating background. In the US, firms became larger and larger with fees being the driving force – that model is broken. What that model led to in early stage venture was VCs deploying more capital than the company needed, which resulted in higher valuations and lower returns. This led to a return to the smaller fund model, the rise of micro VCs and super angels, all of which are new terms for the old fashioned VC. These are funds in the range of $100 – $200 million, deploying up to $5 million in the early stages, but spending a lot of time with the portfolio companies and trying to get better returns. Guhan Subramaniam: The VC industry is now 60 years old and the model has been tweaked over a period of time which is why we see avatars like super angels, micro VCs and so on. However, risk investment is something that is not going away. Any good idea that requires implementation will require support in terms of funds and that will be a pure risk model as opposed to a debt funding model. The business model or expectations could change but I don’t see the VC industry per se going away because it fulfills a very critical purpose. Ramesh Emani: There are several small companies and they need management intervention or advice rather than money. In a country like India this is a fairly large segment which is presently being underserved. Institutions like IIM can take up research projects on the market scope for such interventions, the introduction of technology to improve such processes and systems. There are several companies that are in the Rs 10–20 crores (100–200 million) range, including ITES companies whose managements are happy that they are making money but they do not have the strength or the preparedness to sustain adverse winds. So if institutional mechanisms can be created which are not investment fund oriented but management oriented there is a lot of scope for it in a country like India which has a huge list of SMEs. Thillai Rajan: Given that India requires a lot of funding for entrepreneurship particularly at the early stage, what should be the contours of the VC model particularly as we go forward. Our model is still US-centric. Can we evolve a model that would more relevant to the Indian context? Ramesh Emani: Entrepreneurs’ issues are the same all over, especially when it comes to investments to run the company. Companies need funds and advice and both are difficult to get. The IT industry may be different because it evolved differently. There are several industries and sectors in India, such as healthcare, education or even the corner grocery store, which do not get the attention of VCs today. Healthcare and education are the largest employing industries, outside of the government – these are examples of SME dominated industries which require intervention, both funds and advice; today their only source of financing is banks. By developing India-centric models, we would be able to target these sectors for VC funding. We may have to follow the example of Germany, where one can see a large number of SME’s like in India. Over the years, Germany has successfully developed a financial system to meet the needs of SMEs. Samir Kumar: From the VC standpoint, what we have to see happening in India which is different from the US is smaller funds. And those who are partners in smaller funds will have to live with smaller fees. We need to have LPs from India providing VC funds. Overseas LPs have a very different view towards portfolio companies. Hopefully, Indian LPs will have a better understanding of the situation and enable VCs to invest in companies that will create real value. These are the two things that need to happen. G Sabarinathan: The current VC fund model consists of two sets of relationships: one that exists between the limited partner and the VC fund manager, and the second that exists between the fund manager and the portfolio company. Academic research has segmented the VC field into these two sets of agency relationships. The first set of relationships seems to be replicated fairly successfully across market contexts universally – its key aspects being incentive systems, governance mechanisms, performance measurement and allocation strategy. It has been replicated in the Indian context as well. It is in the second component that the Anglo–Saxon approach to governance may not apply universally to all jurisdictional contexts –a 2010 paper by Cappelli et al. (2010) argues that there is an Indian approach to managing business which is distinctly different from the handed–down Anglo–Saxon approach. Fund managers may need to take cognisance of this. So while there is no need to tweak the first component of the relationship, in the second component, an Indian model is evolving and VCs may need to relate to their portfolio companies differently and also educate their overseas partners. Guhan Subramaniam: Looking ahead, while it is true that early stage funding is drying up and there is less and less of venture capital in India, the funds are becoming sector specific. Today it is not unusual to meet investors who focus only on healthcare or education or technology. At the same time, the restructuring of the industry is being driven by need and compulsion. We could draw a parallel with microfinance. The success of microfinance evolved from the Grameen Bank in Bangladesh, and it has currently become a hot favourite with the large institutional investors in the US. Microfinance has been able to raise a lot more money and that was a response to a situation when 80% of the community could not really access debt from the more structured institutions such as commercial banks. I think something similar may happen in this industry because today the difference between venture capital and private equity is more in terms of the size and stage of investment. The structure would throw up a new business model where we would find that VC is back with a lot more of early stage funding. There will be innovation of business models in this industry. Thillai Rajan: Our discussion has highlighted that the context as well as backgrounds of the VCs can influence the way VCs contribute to the efficiency of their portfolio companies. Thank you all for your inputs and for this very interesting and insightful discussion.